Thursday, November 30, 2023

Your Property …, is it an asset or a liability?

“Buy a house. It is an asset.” This is probably the third most parroted advice drummed into young minds behind the ‘Study hard and Get a job’ old chestnuts.

But is a house really an asset? This question has divided both accomplished experts and inexperienced greenhorns in the property industry. According to self-made property mogul, Mompoloki  Mogobe of Mogobe Group of Companies, the truth lies somewhere in between.

Acquiring a house or property is definitely the biggest purchase in one’s life. Only a handful of Batswana can however pay outright to acquire property. Most have to raise mortgages which oftentimes turn their dream homes into a financial ball and chain.

Mogobe says,“the true view of owning a house was that it was an asset despite how it was purchased and the aftermath of its purchase. But all this changed after the release of Robert Kiyosaki’s book released in 1997 claiming that a house is actually a liability.”

The belief now is that owning a house while staying in it and still paying mortgage is a liability as it takes from ones pocket.  Taking into account that the responsibility of the house will be on you from its insurance, repairs, maintenance, taxes all this being additional expenses. These are costs which many house buyers hardly or ever look into when purchasing a house.

“An asset generates cash flow into ones pocket while liability takes money from it. Buying a house is crucial but for many Batswana, they purchase property solely for personal accommodation, which is fine we all need accommodation. The only downside is that many buy without considering the fine prints of a mortgage and cash flow. Unfortunately, this then takes a lot more from them. This is the same predicament some in the real estate seem to find themselves in as well,” he explains. 

Statistics has shown that about 78.5% of Batswana take mortgages to buy property however; the property is mainly for staying in without generating money from. While this on its own is not a bad idea, what many new property buyers fail to do is they never look in depth to see how they can build equity from the property they are buying on mortgage to avoid a loss.

“The rule of the bank or lender is that one’s salary determines how much they qualify for. Now, the biggest mistake people make when taking mortgage is to take the entire amount they qualify for. As an example, if one qualifies for P800 000.00, they usually take this entire amount instead of making a down payment from their savings and using mortgage to pay the remaining balance.”

“Making a down payment on a mortgage means you have equity and your mortgage is a lesser liability as compared to clearing out all which you qualify for.  This however, will benefit the house owner in a case of selling the property either by choice or by repossession by the bank,” Mogobe says.

Over the years, we have seen many houses being reposed by the bank due to payment failure. During the process the house owner sadly loses money to the bank noted Mogobe. He added that Batswana should always consider building equity on their property first hand to avoid complete loss to banks during repossession if it does happen. 

Additionally, new home owners hardly study the numbers placed before them indicating that they do not care or seem to consider the 1% rule in real estate or sometimes referred to as 1-2% rule. This according to Mogobe is that if a property is rental; the landlord should collect a monthly rent amount between 1% and 2% of the total cost of the property. This rule also applies to one who buys property to stay in using mortgage as they stand in as rent payers to their property.

“This issue of studying numbers is very crucial. If one takes a P900 000.00 mortgage on a house and rents it out at a lesser amount than what is due to the lender or the bank each month, that property becomes a liability. As long as you have to top up your monthly dues to the lender from your pocket to pay, that is money out. It is a liability.” Mogobe affirmed.

To avoid this and to ensure that even the property maintains it self, Mogobe stated that the rent has to cover the monthly mortgage deposit and leave some change. Hence encouraging people to take less of the amount they qualify for this way their monthly deposit will be less and they could make more from the property. In conclusion, he advices Batswana to introspect their decisions when getting into property either as accommodation or business, above all numbers matter.

If the house you are buying has a market rental value below the mortgage rate, that house is considered a liability. It only becomes an asset if it makes you more money than it cost. In simple terms, asset is something that generates a positive margin, and a liability is one that takes away from you. Leading to the emotional investment which is the feel good vibe about having your own house; this kind of investment is not founded on technical research but rather behavioural instincts by market movements.


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